UPDATE - Chcek out regulator William Black's blistering reaction to this story HERE.

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This story from Bloomberg just hit the wires this morning. Bank of America is shifting derivatives in its Merrill investment banking unit to its depository arm, which has access to the Fed discount window and is protected by the FDIC.

This means that the investment bank's European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn't get regulatory approval to do this, they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to "give relief" to the bank holding company, which is under heavy pressure.

This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input. You will also read below that JP Morgan is apparently doing the same thing with $79 trillion of notional derivatives guaranteed by the FDIC and Federal Reserve.

What this means for you is that when Europe finally implodes and banks fail, U.S. taxpayers will hold the bag for trillions in CDS insurance contracts sold by Bank of America and JP Morgan. Even worse, the total exposure is unknown because Wall Street successfully lobbied during Dodd-Frank passage so that no central exchange would exist keeping track of net derivative exposure.

This is a recipe for Armageddon. Bernanke is absolutely insane. No wonder Geithner has been hopping all over Europe begging and cajoling leaders to put together a massive bailout of troubled banks. His worst nightmare is Eurozone bank defaults leading to the collapse of the large U.S. banks who have been happily selling default insurance on European banks since the crisis began.

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Bloomberg

Excerpt:

Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

Moody’s Downgrade

The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody’s decision, said a person familiar with the matter.

Keeping such deals separate from FDIC-insured savings has been a cornerstone of U.S. regulation for decades, including last year’s Dodd-Frank overhaul of Wall Street regulation.

U.S. Bailouts

Bank of America benefited from two injections of U.S. bailout funds during the financial crisis. The first, in 2008, included $15 billion for the bank and $10 billion for Merrill, which the bank had agreed to buy. The second round of $20 billion came in January 2009 after Merrill’s losses in its final quarter as an independent firm surpassed $15 billion, raising doubts about the bank’s stability if the takeover proceeded. The U.S. also offered to guarantee $118 billion of assets held by the combined company, mostly at Merrill.

Bank of America’s holding company -- the parent of both the retail bank and the Merrill Lynch securities unit -- held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.

Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.

“Congress doesn’t want a bank’s FDIC insurance and access to the Fed discount window to somehow benefit an affiliate, so they created a firewall,” Omarova said. The discount window has been open to banks as the lender of last resort since 1914.

The Greek Parliament let this cat out of the bag by accident, I picked it up and linked to some Journalists commentary about the ECB refusing to discuss it as it was 'too sensitive' Bernbaked also refused to discuss, in the usual smoking mirrors strategies terms.Each of then have illegally conspired to deceive and thus defraud the finances in all countries treasuries in the East and West, where are the FBI when you need them?

What about the 600 odd TRILLION dollars in derivatives exposure that has been consolidated into 4-5 banks? (BoA,GS, JPM, etc).How come lying scum like Bernanke use minimalist figures when referring to bailouts but are consistently revealed to be much much more? These venerable institutions serve ONLY the shareholders. In 2008 Ben said "we caused the 1929 ccrash. Sorry, it won't happen again" . Now the coming collapse makes 1929 look like a small bump in the road while any 'remedial actions' are top secret because the insane risks of derivatives will be paid by the taxpayer to protect lobbyists, big dollar donators and the credit line of the terminally deficit addicted CONgress. And Ben has the balls to threaten the collapse IF the FED is audited??!!(NOT the token audit that was done but a FULL comprehensive audit showing where they have been hiding their profits.

It's all by design. They are deliberately taking down the entire international banking system, so they can introduce their world government with one world currency and one world bank. It will be like Federal Reserve on steroids and we will all be poor slaves working hard to make ends meet.

They sure are brazen in trying to get away with this one. If this doesn't spur you on to join the OWS demos, then nothing will. Forget about electing someone who talks the talk about what you may think you want to hear, because like every politician that is serving, along with the wannabes, they are all corrupt. They just want the money, your money. Go ahead and back your favorite, but when he/she screws you in your ass, don't snivel & whine about it, for you will deserve every last stroke they inflict upon you. Think this is B.S.? Wait till the lights go out, then who you going to call?

Do any of your clowns even know what a derivative is? This is 75 trillion in notional value of derivatives. BoA's entire balance sheet is about 1 trillion, if I had to guess, I'd say the fair value of these puppies is only something like 50-100 billion. Furthermore, this isn't a bailout at all. All it is saying is that the commercial bank is now holding the assets, and in the unlikely event that they (or anything else for that matter) were to cause BoA to go bankrupt, the FDIC would still be on the hook for consumer deposits. This is a non-story, and the risk of bankruptcy is almost non-existent. If anyone on this site has any finance knowledge whatsoever check out the spread on a 5 year BoA CDS. Compare that to almost any other company and you can see that the market finds it extremely unlikely that a default will occur.

Yes we understand that $75 trillion is notional. That's not the point. The fact that there is no central, transparent clearinghouse for derivatives trades means that no one knows BAC's net exposure, and that unknown net exposure has just been moved to the commercial banking side of the BAC ledger. The FDIC isn't happy about it because it puts the bank at greater risk of failure, which would put the FDIC on the hook. And since the FDIC fund is basically broke, that puts taxpayers at risk since the FDIC would be forced to tap into their credit line with the Treasury.

The Fed shouldn't allow this risk to be borne by taxpayers, either in the case of BAC or JPM.

"you can see that the market finds it extremely unlikely that a default will occur."

Oh? You mean like the way the market anticipated the meltdown in September 2008? Like that? Or do you mean how market experts like Irving Fisher figured out that the stock market hit a plateau in October 1929?

Query why BAC made this move at all then? Your post is exquisitely silent on this point, oh Intelligent One. Can you elaborate for us plebes?

Finally, as to your reassurance--"I'd say the fair value of these puppies is only something like 50-100 billion"--you, uh, don't have any back-up for that, I notice. Care to provide some?

And "The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers"...WTF does that mean? Anyone?

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Josie

I answered this sort of in my previous comment. The FDIC would be on the hook if BAC failed so they probably don't like the fact that the derivatives exposure has been moved to the banking side of the ledger as it increases the default risk. The Fed is trying to mitigate the demands on BAC capital by counterparties, so they are OK with the move. Classic case of regulators with different goals in mind. I'm just as interested in the fact that JPM has 99% of their derivatives exposure on the commercial side, and the FDIC has allowed it apparently, without creating a stir. I don't think JPM is any safer in the event of a European bank wipeout. As regular readers know, all the banks are massively insolvent, by orders of magnitude, and only fantasy accounting allows them to remain in business. But a hundred billion in real losses from bad derivatives trades would wipe out the capital cushion for both, in a heartbeat.

Just in time for 2012 I see ! We will either be forced to bail them out forever and be uber poor debt slaves forever.. or we will let them crash all at once and resort back to living like indians for a while.. but most of us will die of famine in the process and turn into canibals to survive... That's what Nostradamus had to say about these "end times." You know he is right..

So you're saying you that Bloomberg got the story wrong? I don't think that many people knew that derivative ledger for both JPM and BAC was on the commercial banking side, thus exposing the FDIC. Bloomberg writer Hugh Son did a great job of reporting in my view. And I appreciate that he sent me the story by email this morning right after it was published, making sure that I would see it. He knows the kind of stuff we post here and knew it would appeal to our readers.

"If anyone on this site has any finance knowledge whatsoever check out the spread on a 5 year BoA CDS. Compare that to almost any other company and you can see that the market finds it extremely unlikely that a default will occur. "

Yeah, that's the point. The implicit taxpayer guarantee is already priced into the CDS. In the unlikely event that the BHC isn't bailed out, however, FDIC is on the hook for those deposits. And, as DB pointed out, since FDIC doesn't have the cash on hand, they will have to tap their line of credit with Treasury. Of course, Treasury doesn't have that kind of cash on hand, either. Taxpayers are implicitly guaranteeing BAC's liabilities either way.

Furthermore, because of changes to BK law made in 2005, the CDS counterparties get first dibs on the BAC carcass ahead of other creditors (like bondholders and depositors -- and we never let bondholders eat their losses). So that fact only adds to FDIC's concerns I imagine.

So.... Dr. P. That's a most curious post there. Let me see if I get it.

So now, for taxpayers and protesters alike to say "no more bailouts," they're shooting themselves in the foot with an unknown gauged weapon since the FDIC is on the hook, whereas before BAC did this there was no such reverse moral hazard.

Cheyenne, it's curious indeed. Or, as Yves Smith put it, the move is both "Machiavellian and just plain evil." So you've hit the nail on the head -- by moving the derivatives over like this, BAC almost assures itself of a bailout ("....but it's for the children!...er, the depositors!"). No pol worth his salt would let that puppy drown.

Now, BAC's outstanding debt (bonds) would provide some cushion in the event of a resolution. That is, in order to save deposits (and the Depositary Insurance Fund that backs them), bondholders could take the loss. BAC has about 440B in bonds outstanding and about 1T in deposits, so there is that. If only we allowed bondholders to take losses... But we don't do that anymore because someone else is insuring BAC's debt with CDS, and so on. The derivatives from Merrill just make the situation worse than it was before.

According to my understanding of derivatives, if these derivative contracts fail, then the notional value is the real value. So while things are going well, nobody expects to pay notional value. However, when the SHTF--look out below!

Good point toluene. That's why some people argue that even putting them on exchanges with daily margin postings wouldn't solve the problem. The price tends to jump from tiny to huge very quickly, and because the financial system is so interconnected, its likely that the CDS prices will jump more or less in unison.

CDS are like insurance contracts, except they're not. If you're Met Life or whatever, you have millions of people with an uncorrelated chance of biting the dust, all paying you premiums. With CDS, however, you've only got a handful of people you're insuring (BAC, GS, Citi, Greece...) and they have a nasty habit of getting really drunk and going for joyrides together. There's no economically viable actuarial solution for gambling.

The real number is over one quadrillion in OTC derivatives, not 600 trillion.

I have outlined this to you so many times.

Banks may need more cash to clear derivatives Reuters, Sunday June 5 2011 By Huw Jones

LONDON, June 5 (Reuters) – The world’s top 14 derivatives dealers may need extra cash to handle a surge in transaction clearing, especially in choppy markets, the Bank for International Settlements (BIS) said.

Clearing is being favoured by regulators because it is backed by a default fund that ensures a trade is completed even if one side goes bust, as with the collapse of Lehman Brothers during the financial crisis.

World leaders have agreed that chunks of the $600 trillion off-exchange derivatives market must be standardised and cleared by the end of 2012 to broaden transparency and curb risk.

Researchers at the BIS, a global forum for central bankers, looked at whether the "Group of 14" dealers (G14) that dominate derivatives trading would have enough capital to handle the anticipated surge in trades that will have to be cleared.

BIS concluded in a paper published on Sunday that "it seems unlikely that G14 dealers would have much difficulty finding sufficient collateral to post as initial margin".

"By contrast, dealers may need to increase the liquidity of their assets as central clearing is extended," BIS said.

Thanks for that trip down memory lane. I had forgotten all about that report - they certainly lay it on thick. I think AIG put that out when they were about to ask for their second Fed bailout. Shameless bastards.

Also I read Yves Smith's version of this story and it was outstanding, plus Washington's Blog added an email he got from Bill Black that was pretty illuminating. I will probably post both of those tomorrow.

Have you all considered that the goal was inflation - albeit on specific assets such as housing and wages? All this debt could look like dimes and quarters pretty soon.

By printing money we will see inflation, but obviously not in the abundantly supplied housing market, but enough inflation will occur to make 14 trillion payable, just like they have done in the past. Think about it - Printing more money on our behalf (taxpayers) will create inflation, more money printed, more inflation.... as much as they can get away with. Right now the velocity of money is still going down, but it won't stay that way.

Could we be paying for our debts and groceries with $1000.00 bills? Probably not. They will introduce a global currency so it won't seem so in your face before we get to that point.

Then again, 2012 could put an end to us all.....

So relax, drive your SUV's, enjoy your smart phone and eat out more often. And if you can, drink some of that city water, the fluoride will help calm you down.

Since our system has totally broken down, would a guy actually go to jail if he murdered a few bankers and/or members of the federal reserve? Just curious. I'm not sure which laws and/or societal norms we're still supposed to have respect for. Seems the banksters and their government agents don't have to follow any rules, so why should anyone else? Let's have a free-for-all, shall we?

Labor therapy done in their finest Brookes Bros. suits and newest pair of Floursheims. Of course the Lambo will have to go

The deregulation took years to reach fruition. In two stages, the Rockebush cabal stepped back and let first The Cracker Twins distract the people and then let Obummer, 'steer the big ship' until she went right up onto the rocks. With McDonald's restaurants and plenty of IQ50 TV out there, nobody will notice the unloading of the treasure courtesy the soldiers of the Grand Patron, leaving the U.S. broke and full of arrogant totally lost patriots who ignored their true leaders throughout to watch it happen on TV.

Bernanke and the Federal Reserve Private Pank Institution are apeshit.

They are like terrorists to their own state, disguised and hidden under this political mumbo-jumbo and media.

Corporatism controls government, and they employ their own idiots like Obama (Yes yes i know) and Bush. It's not the congressmen, it's that they allow themselves to be bought out by the Corporations that truly controls America and it's laws. They control EVERYTHING, and the feds are just part of it!

You want the truth? Turn off the TV. Media is controlled by them too.

You want to truly 'change' America (Oh, like that word wasn't corrupted with Barack Oh-Bumma?) Then setup group peaceful movements around the states! Media is basically a Propaganda and Political Salesperson Machine all rolled in one! Fox news, CNN, MSNBC, CBS, etc etc suck!

Private Bankers own America and get their puppet leaders to basically shoosh everyone and dictate the country and start wars and say screw the constitution and use lies and the media to allow people who don't have a brain to think to accept these policies to start wars!

*Sigh* But you can't change human ignorance... It's all around the world, and only the super, SUPER rich families and individuals are cashing in in expense to human lives, poverty, hunger, terrorism and all of that stuff! Money is evil!

But we are united. We do not forgive, we do not forget. We are going to not stoop to their level and use violence. Peace and Love always wins!

I hope true peace comes when the people unite for the cause for all of our problems for OVER 30 YEARS!

Nostradamus was right insofar as it goes. But he was a manufactured seer. What he 'saw' is what has been programmed for him to 'see' in an insane pursuit to fulfill what is called "prophecy".

Human history has been one long stretch of manipulation (money-pulation) by controllers whose ultimate aim is for everything to culminate in an "end-time" Armageddon scenario.

Here's a message from a true seer: "Time" as we've known it is coming to an end. We are moving into what by contrast necessitates being called a 'time-less' reality (true time), and any notions of "time is money" will become absurd on its face.

How everything plays out remains to be seen, and "Armageddon" isn't etched in stone.

@ Raphael: "You want to truly 'change' America (Oh, like that word wasn't corrupted with Barack Oh-Bumma?) Then setup group peaceful movements around the states! Media is basically a Propaganda and Political Salesperson Machine all rolled in one! Fox news, CNN, MSNBC, CBS, etc etc suck!"

I read and comment over at Karl Denninger's place, where Karl (to his great credit) has been encouraging his readers to set aside their media-inspired prejudices and try to make common cause with the OWS movement. It dismays me to see the resistance to this idea, to see his readers casting about for any excuse to dismiss OWS.

Your fellow citizens, regardless of their politics, are NOT the enemy. We know who the enemy is, and if we don't put aside our differences and band together, we don't have a prayer.

I'd like to know WTF our government is thinking, and why isn't the 2002 Sarbanes-Oxley Act for corporate accountability not being applied?!! Where is the governments Corporate Fraud Task Force (CFTF) in all of this? We can longer afford to let them sleep on the job !

the occupy wallstreet bickering isn't going to end this issue. they are barking to empty ears. time for a real statement, stop buying big corporate, take your money out of the banks. peaceful protest was crushed years ago. time for a revolution.

This story from Bloomberg just hit the wires this morning. Bank of America is shifting derivatives in its Merrill investment banking unit to its depository arm, which has access to the Fed discount window and is protected by the FDIC.

This means that the investment bank's European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn't get regulatory approval to do this, they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to "give relief" to the bank holding company, which is under heavy pressure.

This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input. You will also read below that JP Morgan is apparently doing the same thing with $79 trillion of notional derivatives guaranteed by the FDIC and Federal Reserve.

What this means for you is that when Europe finally implodes and banks fail, U.S. taxpayers will hold the bag for trillions in CDS insurance contracts sold by Bank of America and JP Morgan. Even worse, the total exposure is unknown because Wall Street successfully lobbied during Dodd-Frank passage so that no central exchange would exist keeping track of net derivative exposure.

This is a recipe for Armageddon. Bernanke is absolutely insane. No wonder Geithner has been hopping all over Europe begging and cajoling leaders to put together a massive bailout of troubled banks. His worst nightmare is Eurozone bank defaults leading to the collapse of the large U.S. banks who have been happily selling default insurance on European banks since the crisis began.